Seeking Alpha
Long only, value
Profile| Send Message| ()  

I reiterate my bullish stance on Duke Energy (DUK) following its recent financial results for the full year, 2012, and 4Q'12. The company has delivered strong financial results in the past and was able to beat analysts' earnings consensus according to recent earnings release. Last year, 2012, proved to be a good financial year for the company, as it expanded its top line for the year, completed its merger with Progress Energy and worked on its fleet modernization.

Financial Results

DUK was able to post strong financial results and beat the earnings consensus for the recent full year 2012 and 4Q'12. Improved bottom line results were mainly driven by synergies from DUK's merger with Progress Energy in 2012, revised rate cases and new security plan in Ohio.

DUK reported fourth quarter EPS of 70 cents, down 1.4% YoY, beating the analysts' estimates of 64 cents. Adjusted EPS for the full year 2012 was $4.32, beating the analysts' estimates of $4.26. Also, adjusted EPS for the year was on the higher end of full year earnings guidance of $4.20 - $4.35. Net revenues for the year came out to be $19.6 billion, in line with the analysts' consensus.

DUK was able to grow its customer count for the year 2012. Following are the customer count growth for different reporting segments for the year 2012.

Progress Energy Carolinas

Duke Energy Carolinas

Progress Energy Florida

Duke Energy Indiana

Duke Energy Ohio

Customer Count Growth for the Year

0.8%

0.6%

0.8%

0.6%

0.5%

Source: Earnings Release

Moreover, sales to commercial and industrial customers increased whereas residential sales were flat, resulting in weather normalized volume growth of 0.6% for the year, 2012.

Rate Cases and Projects Update

Duke Energy Carolinas, filed a rate case increase with NCUC (North Carolina Utilities Commission) earlier this month requesting a ROE of 11.25% and an increase of 9.7% in net retail revenues. Hearing on the rate case is expected to start in July 2013, and new rates are anticipated to be effective from Sept. 2013.

Another rate case was filed by Progress Energy Carolinas in last quarter of 2012. The rate request an average increase of 11% in retail net revenues, with requested ROE of 11.25%. Hearing for the case is scheduled to begin in March next month. If the request is approved, new rate will go effective from mid of 2013.

Also, earlier this month DUK finally announced its intentions to retire Crystal River 3 Nuclear plant. The plant was out service since September 2009. DUK is likely to receive insurance claim of $835 million in total, out of which $305 million has already been received.

DUK has been working to improve its fleet modernization by replacing inefficient plants by more efficient ones. It is expected to add Edwardsport plant to its generation capacity soon. Edwardsport plant construction is complete and it is expected to be in service by mid of 2013. The plant currently is in the final phase of the testing required before putting it into service.

What to Expect on the analyst day?

Following the recent earnings release, investors are now focused at analyst day on Feb. 28. DUK is likely to give update on the recent merger synergies, its plans on financing activities and CAPEX, and earnings guidance for the year.

Outlook

Approval of pending rate cases (mentioned above) will result in bottom line expansion for DUK in future. Analysts are expecting a decent next five years growth rate of 3.05%. Following are the next three years analysts EPS consensus.

Year

EPS est.

2013

$4.35

2014

$4.65

2015

$4.85

Source: Nasdaq.com

Dividend and Debt

DUK currently offers a high dividend yield of 4.4%. It has increased its dividend at a rate of 3% on average in last 5 years as shown in the following graph. Also, it has solid dividend history and never missed a quarterly dividend in last 87 years, which indicate dividends offered by the company are safe and sustainable.


(Click to enlarge)

Source: Investors Presentation

DUK has a healthy balance sheet, with investment grade credit rating from different rating agencies. It has a long term debt to equity of 88% and a decent interest coverage of 5.08x. Following are the credit ratings of DUK assigned by different credit rating agencies.


(Click to enlarge)

Source: Investors Presentation

Conclusion

DUK remains attractive investment for the investors, as it has high dividend yield of 4.4%, cheap forward P/E of 14.9x and low long term debt to equity of 88% as compared to its peers.

DUK

Southern Company (SO)

Wisconsin Energy (WEC)

Exelon Corp (EXC)

Dividend Yield

4.4%

4.4%

3.4%

3.95%

Forward P/E (Based on 2014 EPS est.)

14.9x

15.1x

15.7x

14x

L.T Debt to Equity

88%

97%

107%

86%

Source: Yahoo Finance

Using utility sector forward P/E of 15.2x and DUK's forecasted EPS of $4.65 for 2014, a price target of $71 is calculated.

Source: Reiterate Buy On This Utility Giant For Your Dividend Income Portfolio